Fiat Chrysler's surprise decision to withdraw a merger offer with French carmaker Renault stunned the industry, collapsing Thursday on fundamental differences over when Renault's long-time alliance partner, Nissan, would be brought in.
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The merger plan, which had sought to create the world's third-largest automaker, had been viewed positively across the industry since it was announced last week. And it appeared to be a done-deal when the Renault board met for a second day in Paris on Wednesday evening.
But Fiat Chrysler Chairman John Elkann decided to withdraw the offer as the Renault board meeting entered the early morning hours after the French government - Renault's top shareholder with a 15% stake - asked for more time to seek Nissan's blessing.
A person in Italy who has been close to the talks said both the French government and Nissan had agreed during the course of months-long negotiations that the Fiat Chrysler-Renault merger would happen first, and then the future of the alliance would be considered at a later stage.
The person said France essentially backtracked this week when it said it wanted the backing of Nissan before agreeing to start working on the details of a potential merger.
"A merger cannot be subject to external conditions," said the person, adding that withdrawing the offer was not a negotiating tactic. The person spoke only on condition of anonymity because details of the negotiations were not publicly disclosed.
In a statement, Fiat Chrysler cited "political conditions in France" for its withdrawal. The company said it had no hard feelings with either Renault or its alliance partner Nissan, thanking them both for their "constructive engagement."
The French government hit back by characterizing Fiat Chrysler's behavior as "pushy," blaming it for placing "massive pressure" to quickly take the offer or leave it. They later softened their tones, indicating there might be room for future negotiation.
"We have closed no doors," said an official at France's Economy Ministry who spoke on condition of anonymity to discuss the negotiations.
Renault said it was disappointed over the lost opportunity but also talked about the offer in the present tense, indicating there was still hope to revive it: "We view the opportunity as timely, having compelling industrial logic and great financial merit, and which would result in a European-based global auto powerhouse."
In Italy, a representative of the powerful metal mechanics union also expressed hope that the withdrawal was a tactic to restart negotiations, blaming Nissan and the French for complicating talks.
Analysts Philippe Houchois and Himanshu Agarwal from research firm Jefferies noted that the Fiat Chrysler statement was carefully worded in a way "to leave the door open to further discussion."
News of the plan's failure mainly hurt Renault's shares, which tumbled 7% to 52.45 euros, in early trading. Fiat Chrysler's share price recovered from an early dip trading flat at 11.65 euros.
From the time merger was proposed, it was clear that the French government's position and Renault's alliance with Nissan could be sticking points.
The French government said Thursday that it had placed four conditions on the deal during talks.
It demanded that any merger be completed as part of the existing alliance between Renault and Nissan, preserve French jobs and factories, respect the governance balance between Renault and Fiat Chrysler, and ensure participation in an electric battery initiative with Germany.
"An agreement had been reached on three of these conditions. It remained to obtain explicit support from Nissan," said French Finance Minister Bruno Le Maire.
Le Maire asked for five days to secure Nissan's support.
Nissan had earlier expressed reservations about the merger deal, saying it raised questions about its alliance with Renault. On Thursday, Nissan declined to comment on the latest developments.
Le Maire is traveling to Japan this weekend to meet with Nissan officials on a previously arranged visit.
Most industry experts praised the proposed 50-50 merger, saying each side bought strengths that covered up the other's weaknesses.
The combined company would have produced some 8.7 million vehicles a year, more than General Motors and trailing only Volkswagen and Toyota. It would have saved an estimated 5 billion euros ($5.62 billion) per year in purchasing expenses and costs developing autonomous and electric vehicles.
It would have been worth almost $40 billion. If Nissan had gone along, it would have created the world's biggest auto company.
Now, Fiat Chrysler and Renault must find a new way to address any shortcomings at a time when the auto industry is in the midst of a global sales slowdown and facing enormous expenses to develop future technologies.
Karl Brauer, executive publisher at Kelley Blue Book and Autotrader, said the merger talk was likely to have affected other boardrooms in the automotive industry, where tie-ups can lead to significant savings on investments in costly technology, especially as the industry faces the transition to electric powertrains and autonomous and semi-autonomous driving.
"A reassessment of partnership opportunities was likely initiated at every major global automaker in the past 8 days, and those assessments won't end with FCA's withdrawal from this deal," Brauer said.
Hinnant and Charlton reported from Paris. Tom Krisher in Detroit contributed to this report.